CalSTRS’ Real Estate Portfolio Drops 2.3 Percent in Third Quarter

By Jon Peterson

The California State Teachers’ Retirement System has reported a $327 million loss for its real estate portfolio during the third quarter, even as the value of its asset overall climbed nearly 10 percent during the same three months.

The country’s second-largest public pension fund entered the fall season with real estate assets valued at $13 billion. When the quarter was over, the value of the portfolio was $12.7 billion, a 2.3 percent decline.

The rate of decline slowed from a nearly 20 percent drop in the first quarter compared to the end of 2008, and a slightly more than 20 percent decline in the second quarter compared to the first three months of 2009.

CalSTRS provides retirement, disability and survivor benefits for 833,000 public-school educators statewide, including elementary, high school and community college employees and their families. The administrator pays out $8 billion in benefits annually.

According to CalSTRS officials, the losses reflect value declines across the real estate portfolio with every sector seeing adjustment. CalSTRS saw its biggest value drop ($237 million) in its tactical assets, which are characterized by higher-risk and greater leverage and include such things as land, specialty real estate and international holdings. Tactical-asset values fell to $7.765 billion.

At the same time, the value of its core real-estate portfolio slid by less than 2 percent from $5.03 billion to $4.94 billion during the third quarter. Core assets are established and leased properties with leverage of 50 percent or less. The pension fund normally buys a mixture of office buildings, industrial properties, shopping centers and apartments across the country for its core holdings.

CalSTRS owns no public real estate investment trust stocks or real-estate operating companies, though its investment policy allows both.

The pension fund did no real estate buying or selling during the quarter. According to fund officials, the lack of activity is mainly due to the current market’s volatility and uncertainty.

That said, the pension fund has the potential to be a player in commercial markets next year. At September’s end, real estate assets comprised less than 10 percent of the pension fund’s total holdings. But current board policy calls for 12 percent of assets to be allocated to the property sector. That allocation may rise to 13 percent after Jan. 1, based on board action taken earlier this year.

The decision whether to beef up holdings will be made by real estate staff, existing real estate fund managers and CalSTRS consultant, The Townsend Group, based on the opportunities that present themselves. If they don’t believe there are good deals to be had, the agency can postpone the increase in its real estate allocation by six months.

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